Cost/ benefit analysis of mobile transaction levies

Among the leading issues of discussions in Tanzania from the second week of July 2021 is the newly-introduced mobile transaction levy. This follows coming into effect the levy that was approved in the 2021/22 budget.

The rates have been highly criticized as being too high compared to the ability of many to pay, and their potential related cost to the economy. The measure was proposed to widen the narrow tax base as part of increasing domestic resources mobilization.

This is important in financing public goods and services. The criticism around the levy has caught the attentions of the Finance minister and his ICT counterpart. As if this were not enough it called for the attention of Prime Minister Kassim Majaliwa and President Samia Suluhu Hassan who ordered interventions in the matter. Experts are dealing with the matter and will advise the government accordingly. As part of inputs in this heated debate, this piece gives a cost/benefit analysis of the levy.

Financial inclusion

Tanzania has come a very long way in the financial inclusion space. Data from the Financial Sector Deepening Trust (FSDT) and elsewhere show that the highly-celebrated financial inclusion achievement in Tanzania is largely due to mobile phone transactions.

In the context of this article, mobile phones are equivalent to banks in this era of digital economy.

They are digital wallets that facilitate transactions involving sending and receiving money. In this day and age, a banking hall is not necessarily the place to go to when mobile phones money transaction are possible and efficient.

Mobile money has fuelled deep penetration of financial services to the remote places. This has made it possible for those not traditionally banked at brick and mortar banks to be financially-included. Among other things, this has been made possible by Financial Technology Companies (FinTechs) and many banking agents across Tanzania.

High levy rates substantially increase transaction costs for users of the mobile money system, and jeopardize financial inclusion.

There are possibilities of users of mobile money transfer services to opt for other alternatives which will be second best alternatives.

These include going back to cash money transfer through such means as buses. This has a lot of negative impacts including time lost from sending physical money to buses to receiving the same.

 Another alternative is the use of brick-and-mortar banks - but which only applies to the very few banked Tanzanians. Letting go the hardly gotten financial inclusion has a lot of negative multiplier effects economically, politically and socially.

Cost of cash economy

In these times of the Fourth Industrial Revolution where economies are continuously embracing digital technologies, it will be a very big blow if the high mobile money transfer levies will take us as a nation back to the bad old days of cash economy.

Majority of mobile money transfer services user are highly price sensitive. Their levy elasticity of demand for these services is very high. They are likely to switch to cash economy in order to save increased marginal cost of engaging in mobile money transactions.

Behavioural economics may make us think that people will be used to the high levy rates and continue   transacting via mobile money transfer.

With cash transactions alternatives at hand, there is great likelihood to see people falling back to the ages of cash economy. This is because people are homo-economicus (economic beings by nature), and will always look for best alternatives for them. This is mainly the case for those who are price sensitive. They are likely to be many. The litany of both pecuniary (monetary) and non-pecuniary costs of cash economy is very long.

They include time lost in doing cash transactions, security issues around cash money, fraud, Covid-19 issues and delayed transactions that can have many and far-reaching negative economic implications.

Ways forward

Among the ways forward in this matter is to reduce the levy rates or remove it altogether. In the final analysis, this can have better outcome in the economy in the medium-to-long term by unleashing the potentials that high levy rates block.

These include potentials for faster transactions, more employment, incomes, consumptions and related positive multiplier effects of having lower levy rates in the context of expansionary fiscal policy.

The author is Associate Professor of Economics at Mzumbe University